Dianne Feinstein willing to look at mortgage interest deduction

Even as we watch the spectacle of Republicans throwing anti-tax activist Grover Norquist under the bus (it started the day after the election with House Speaker John Boehner putting revenue on the table), some Democrats are eying other sacred cows.

In a telephone interview before her re-election, Sen. Dianne Feinstein said she would support scaling back the mortgage interest deduction — the most revered bovine of all — to help reduce the deficit.

The California Democrat said Congress should use the Bowles Simpson framework to attack the fiscal cliff, giving the Finance Committee time “to work out which deductions” should be trimmed to raise revenue.

“For example, nobody is going to want to take the interest deduction from someone’s first home away,” Feinstein said. “Maybe second, third, fourth, fifth” house though. “You have to look carefully at things like child tax credits, the AMT (alternative minimum tax) has to get fixed, probably the R&D tax credit should continue, the doc fix (perennial roll back of slated cuts for Medicare providers).”

Just three metro areas – greater New York, Los Angeles and San Francisco – receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourko. Mortgaged homeowners in the San Francisco and San Jose region receive $4.6 billion a year from the McMansion tax break, according to a study by John Burns Real Estate Consulting in Irvine.

The tax break is available to anyone who borrows up to $1 million for a mortgage – including for a vacation home – or takes as much as $100,000 in a home equity loan. The bigger the mortgage and the higher one’s income, the bigger the deduction. A person in the top tax bracket of 35 percent who borrows $1 million can get a tax break of $17,500. That’s on top of a slew of other subsidies such as preferential capital gains taxes on the sale of a primary residence, deduction of local and state property taxes, and subsidies to mortgage giants Fannie Mae and Freddie Mac.

By comparison, households earning less than $75,000 get less than $200 in savings from the deduction. More than three-fourths of taxpayers do not itemize, and so don’t claim the deduction at all. Those who rent or have paid off their mortgages, most of them seniors, get no benefit.

Californians receive 2 1/2 times as much in mortgage interest deductions as Texans, and have for decades. Residents of the Dakotas, Mississippi and Arkansas regularly receive among the lowest share of benefit. McAllen, Texas, mortgage holders get about $23 million a year from the deduction, but Petaluma and Santa Rosa homeowners get more than $300 million, according to the John Burns Consulting study